Millennium Services Group Ltd - Contract Renewals Highlights Stickiness
Millennium Services Group Ltd
Contract renewals highlights stickiness
Millennium Services Group Ltd (ASX:MIL) has announced the extension of several contracts worth a combined $150m over terms spanning two to four years. The key message here is both the general stickiness of contracts and length of contracts relative to our selected peer group. Quarterly revenue disclosures highlight that not only are contracts sticky and medium-term in duration, but they also deliver consistent revenue across quarters providing strong visibility for contract management. Our assessed peer group of people-heavy service businesses has held-up well over the last two months, declining an average of 6% and now trading on an estimated FY22 EV/EBITDA multiple of 4.6x. The MIL relative multiple to this peer group has widened to a ~65% discount or an estimated 1.7x FY22 EV/EBITDA. The average peer multiple would imply a share price of $1.00/share. With longer than average contract terms across a diverse range of tier-one customers and a strong balance sheet, we see no reason why a multiple closer to the peer average is not achievable.
Business model
MIL is a human services business with a focus on the essential services of cleaning and security, bidding for predominantly long-term contracts that have annual contract adjustments to protect MIL from movements in labour resource costs. Additional volumes over and above those contracted can be gained from ad-hoc services, which represent ~15% of group revenues at a higher average margin. Satisfying contractual obligations utilising a vast workforce and procuring consumables for the jobs within the contracted price is key to profitability. Historically focusing on cleaning and security services within major shopping centres, MIL is looking to de-risk the retail exposure by moving into new sectors including aviation, aged care, education and government. An increased focus on compliance (Fair Work, Modern Slavery Act and Labour Hire regulations) and utilising the ASX-listed nature of the business to demonstrate transparency in these important areas (which most large private companies can’t achieve) will be keys in this push.
Customer relationships and contract terms shine through
We have highlighted from recently quarterlies the incredibly consistent revenues quarter- to-quarter despite COVID-related disruptions, and now we can highlight the generally sticky and medium-term duration of most contracts with $150m in business renewed across four clients for periods ranging from two to four years. Such consistency, stickiness and duration aids in the profitable management of the business. This is a key advantage MIL has from a business model perspective relative to most of our assessed peers.
Relative EV/EBITDA implies a $1.00 valuation
Our assessed peer group average FY22 EV/EBITDA multiple implies a $1.00/share valuation for MIL (4.6x EV/EBITDA), and we see no reason why this business does not deserve peer- average multiples given average contract length (two-five years), relative working capital intensity and market opportunities. Selected peers include Service Stream (ASX:SSM), GNG Engineering (ASX:GNG), Lycopodium (ASX:LYL), Southern Cross Electrical (ASX:SXE) and Ashley Services (ASX:ASH).
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